The Risks of Early Access to Your Superannuation

The Risks of Early Access to Your Superannuation

Our day to day life has changed for a lot of Australians. Iso life may have been nice for a while but the novelty of netflix every weekend wore off pretty quickly. We are now all eager to get back out and enjoy our ‘normal’ lives again. For some of us, our new normal may look very different to what it did pre covid, especially if your income was affected during this time. One of the ways the government has offered to help relieve some financial stress is by letting many Australians access their super early. But just because you can, does it mean you should? 

Let’s take a closer look at what it all means and what early research is showing so that you can make the right choice for your situation.

The new COVID-19 rules

Normally, it’s pretty hard to get early access to your super. You have to prove severe financial hardship or compassionate grounds for why you should be allowed to. However, with the Scott Morrison government’s support package for COVID-19, it’s a lot easier for Australians to make early withdrawals from their super. 

Here’s the breakdown: 

Who’s eligible?

  • People who are unemployed;
  • People who are eligible for Job Seeker, youth allowance for jobseekers, parenting payment, special benefit or farm household allowance;
  • People who lost their job in 2020;
  • People who have 20% less working hours in 2020; and
  • Sole traders who had 20% less turnover in 2020.

How much can be withdrawn?

If you’re eligible, you can withdraw up to $10,000 tax free now, and up to $10,000 in the new financial year. That means you can withdraw up to $20,000 from your super. Sounds like a good deal, but there are risks to consider. 

What’s the purpose? 

Early, non taxable access to super is just one of the many strategies Scott Morrison’s government is offering Australians to help them get through the financial uncertainty surrounding COVID-19. 

The idea is that if your household is struggling to pay for essentials, this access to funds will provide the relief you need. However, recent research by Ilion and AphaBeta suggests Australians that have withdrawn their super aren’t just using it to pay for their essentials.

How are people using their super?

Although the early super strategy was meant to be a desperate measure for desperate times, new data suggests as much as 40% of those who withdrew super had no drop in income or were receiving government payments. (Source: https://www.smh.com.au/business/the-economy/super-bender-retirement-nest-egg-withdrawals-used-to-boost-spending-on-non-essentials-20200531-p54y5q.html )

What’s more, when Illion and AlphaBeta collected data (Source: https://www.smh.com.au/business/the-economy/super-bender-retirement-nest-egg-withdrawals-used-to-boost-spending-on-non-essentials-20200531-p54y5q.html) from 13,000 people who withdrew superannuation, it seems the money wasn’t just being spent on necessities. Infact, on average spending nearly tripled the fortnight after withdrawing.

So what exactly are people spending their early-withdrawal super on? 

  • 22% is going to essentials;
  • 14% to repaying debts; and
  • 64% is going to non-essential lifestyle spending such as leisure, cafes, entertainment and gambling.

It seems that many families have seen the early access to super as an opportunity to increase their lifestyle spending. If you have the opportunity, why should you pass on it? 

Before making any large financial decision, it’s best to take time to look at the big picture, weigh up the pros and cons, and get your head around the risks you’ll be taking.

What are the risks of withdrawing super early?

Superannuation is the money we put away for our retirement. That means, if we dig into it now, there could be consequences in the future.

When you withdraw your super early, there are three big risks you face.

1. Having less money in retirement

If you withdraw $20,000 now, how will that affect your retirement?

First, we need to understand how super works. When we make a contribution, our super fund takes that money and invests it. The market has ups and downs, but over time, the money you invested will grow.

So if you withdraw $20,000 now, you need to consider how much that $20,000 could have become by the time you retire. Of course this will depend on how old you are, how much super you contribute, and at what rate it grows. But to give you an idea, here are some numbers from Canstar (Source: https://www.canstar.com.au/superannuation/risks-access-super-early/).




Starting Age

Starting Balance

Difference

25

$20,000

-$102,824

30

$40,000

-$83,699

35

$60,000

-$68,245

40

$80,000

-$55,603

45

$95,000

-$45,347

50

$110,000

-$36,940

 

These numbers indicate that withdrawing $20,000 now could potentially become big losses for your retirement. And the younger you are, the bigger the impact.

2. Setting your losses in stone

Thanks to the uncertainties surrounding COVID-19, the stock market is seeing huge losses which has an impact on super funds. That means withdrawing super now could lock in those losses. Later on, you won’t be able to grow that money to get back the losses. 

3. Losing your life insurance

Accessing super early could leave you without life insurance. 

70% of Australians (https://moneysmart.gov.au/covid-19/accessing-your-super) with life insurance hold it through their super. However, if your super gets too low, your life insurance could be automatically cancelled. 

Alternative solutions 

Only you can choose whether to take money out of your super or not. If you’re in need of financial relief at this time, but aren’t sure if early super withdrawal is the best decision, it’s worth taking a look at what other options are out there. 

1. Change your spending habits

A great place to start is by taking a close look at your bills and spending habits to see if there are ways you can spend less. Perhaps there are subscriptions you could cancel, more affordable suppliers you could switch to or simple lifestyle changes you could make. 

2. Government payments

Are you eligible for any government assistance at this time? There are many different ways Australians can get financial support from the government that doesn’t affect your retirement fund.

3. Short term loans

Instead of reaching into your super, there are other ways to get short term financial assistance, such as short term loans. With short term loans, Australian families may be able to find the financial relief they need without the stress of impacting their retirement in the long run. Check out our short term loan calculator to get easy access to fast cash without affecting your long term retirement plan.

While accessing your super may be tempting, it can affect your financial situation later in life for some short term gain. There is a better way! Short term loans are a simple way to get cash fast without touching your valued super and frees you to live the life you’re meant to live.